The Wealthy Barber: Planning For The Future

This week, The Simple Dollar takes a look at David Chilton’s The Wealthy Barber, a uniquely-written personal finance guide that has found its way onto people’s shelves for decades. Should it find its way onto your bookshelf? Let’s find out.

Once the “ten percent solution” was covered, Roy (the titular wealthy barber) moves onto some other aspects of sound financial planning, mostly in terms of planning for disasters and for the golden years. The next two chapters focus on insurance, retirement, wills, and that other dreaded “r” word, responsibility.

First, the wealthy barber pretty much demands that everyone has a will. He recommends having it done professionally, because some situations may also call for a revocable living trust as well, and knowing the situation for each (or both) can be complicated. The barber’s insistence on this is so intense that it actually becomes part of the ongoing plot of the book.

Second, Roy lays out life insurance in a very intelligent way, indicating that you only need life insurance to cover your dependents, and if you don’t have any, there’s no need for insurance (as your estate should be able to pay for your internment). In other words, single people and children have no need for insurance because they have no dependents, but married people and (especially) parents need plenty. The book advises that your life insurance should be enough so that your entire financial commitment to the dependent’s life is replaced until they can become independent and it should be invested conservatively to return this amount (about 8% return). So, if you make $50,000 and you want that much to exist to cover your dependents, you need to have about $625,000 in life insurance.

As for insurance types, the book advocates term life insurance for reasons similar to the ones I discussed a while back on The Simple Dollar: if you’re planning well, you won’t need life insurance in your final years, so why pay for it?

So what does the book say about retirement? Basically, put as much as you can into retirement now. The specific options for investment are a bit outdated, so I won’t mention them now, but you should be dumping everything you can into your employer’s plan if they offer matching and maxing out a Roth IRA (this advice is based on the logic from the book, but Roth IRAs are newer than the book).

Now that the future is taken care of, what about investing for the shorter term? Tomorrow, we’ll see what the wealthy barber has to say about buying a home, large purchases, and additional investing.

You can jump to the other parts of this review of The Wealthy Barber by using the following links:
Overview
The Ten Percent Solution
Planning For The Future
Financially Savvy Living
Buy or Don’t Buy?

The Wealthy Barber is the eleventh of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

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  1. Rich says:

    With respect to the 10% rule, is it widely accepted that 10% into a 401k with company match covers this philosophy? I’m assuming so, but I thought it might include another 10% into some sort of savings account or other vehicle.

    I think I need to re-read through your ‘magic number’ post to determine what my family needs in retirement.

    Excellent stuff Trent.

    Rich

  2. Trent says:

    Rich: 10% in your 401k should work just fine, though you might want to look at other options for the amount above what your employer is matching. For example, if you’re eligible for a Roth IRA, you might be better off putting some percentage into that for the tax benefits (money that comes out of a Roth IRA when you’re retired is not taxed, while 401(k) money is taxed when it’s withdrawn).

  3. Terry says:

    Is there a “The Wealthy Hamburger Flipper”? That’s what I need.

  4. Tim Maynard says:

    I found the wealthy barber to be a great book. However, I feel that the books take on life insurance is dated. It basically says to buy term insurance and invest the rest. This philosophy is certainly not the best solution for all people and in some cases can leave people vulnerable as they get older and can no longer afford term insurance. Not everyone gets rich enough to be “self-insured” as the book suggests. Many people have a life long need for life insurance, and term policies do not deal with this scenario. 98% of term policies never pay out, since they usually become unaffordable before you actually die.

    Picking up a small amount of Permanent Insurance can be a life saver for many aging couples. Yes, it is not as good an investment as stashing it into you RRSP, but who cares. It is apples & oranges. They are different, and it shouldn’t be a case of one or the other. Do you go to the store and say to yourself, “I shouldn’t buy thins shirt because it is better to put the money in an RRSP?” No, of course not. You need the shirt, so you get it. It’s the same with Permanent Insurance (albeit, you can argue that a shirt is a necessity). On that note, I would argue that to some degree Permanent Insurance is a necessity, even if you are putting as little as $50/month into it.

    My in-laws can no longer afford their term insurance, so now they have to deal with 20-30 years of not having any coverage. They have no money to pay for funerals and can not afford to take it out of their RRSP. They read the wealthy barber when it first came out and that is why they are in this position.

    In closing, there are very good things that can be taken from the book, but not everything should be followed to the letter (specifically the section on life insurance). People should read various books, talk to a financial planner and then figure out what will be best for them.

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